Inflated, understated income on car loan applications common

Twenty percent of auto loan applicants overstate their income by at least 10 percent, while another third of borrowers understate it by 10 percent or more, according to the artificial intelligence stipulation document review firm Informed.IQ.

Underwriters help lenders catch such errors. But Informed CEO Justin Wickett said the company found humans overlook 12 to 17 percent of the cases of misstated income.

The data Wickett shared in December illustrates an issue Equifax also has been highlighting during the past year while promoting its digital verification solution, the Work Number.

According to an Equifax analysis of late 2018 data, 38 percent of consumers overstated their income by at least 20 percent on auto loan applications, and 14 percent understated it by at least that much. The research, the company's most recent study of the subject, found discrepancies by comparing customer assertions with actual payroll data available through the Work Number.

Both companies' research suggests dealerships and lenders are relying on faulty income information for half of the customers they consider for retail installment contracts or loans. This can have real consequences for debtors and creditors.

Four percent of people who overstated their income end up at least 60 days past due on their car payments, according to Equifax.

That's double the 2.1 percent delinquency rate Equifax found among those who correctly represent their incomes.

"It is very much of a leading indicator," Shelly Nischbach, vice president of verification services for Equifax Workforce Solutions, told Automotive News last week.

Only 0.8 percent of those who understated their income were past due by 60 days or more, according to Equifax.

Informed.IQ found consumers who understated their income paid more than $1,000 in additional interest on their loans than their risk would require, Wickett said.

A comparison of borrowers who made and reported $65,000 in income and those who made $65,000 but stated a lower amount reveals those who understated received an extra 0.6 percentage point worth of interest.

According to Wickett, customers who understated their income were 20 percent more likely to have received some kind of variable pay, such as overtime or tips. Lower-income borrowers also were more likely to understate their pay.
Neither Nischbach nor Wickett had a sense of which consumers might be unintentionally overstating their income.

Nischbach said dealerships can use the company's Work Number tool to validate customer income. Informed.IQ is typically used at the lender level to check income, but Wickett said it would be possible to tie his company's capabilities into dealership software.

He said dealership management system providers and dealership credit application aggregators had been in touch.